How Banks Make It Hard For Sexy Startups

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Porn and sex toys aren’t illegal, but banks often treat them that way. Critics say the practice is discriminatory and amounts to censorship.

Last summer, Zoë Ligon, an erotic artist, was in the early stages of starting an online sex-toy shop she anointed Spectrum Pleasure. She visited a Bank of America branch in Detroit, wanting to open a checking account and take out a line of credit in order to start purchasing inventory. For the latter order of business, a Bank of America banker put her through to a credit specialist. The woman on the other end of the line was disinterestedly running through a list of scripted questions until she saw the word “pleasure” in the LLC title.

“I remember, she just stopped short in the middle of the sentence and was like, ‘Ma’am, what kind of a business is this?’” recalls Ligon. “All of a sudden, her tone totally changed. I was being talked to like I had an illegal business.” With no further explanation, the credit agency refused to extend Ligon a line of credit because her shop qualified as an “adult business.”

Even though she had previously faced repeated rejections trying to start a brick and mortar store, Ligon says, the incident at the bank “might have been the first time I broke down into tears since starting the business.” An added kick in the teeth came later that day when she received a sales call from a Bank of America employee trying to get her to sign up for its new e-commerce platform, only to be denied once more. “Oh, I’m sorry, we don’t offer this service to adult businesses or marijuana businesses,” the salesperson explained to her over the phone.

“I was already emotional. It had been such a long day,” remembers Ligon, who was keen to sign up. “It was incredibly awkward to have a sale retracted from me.”

Sex toy shops are legal but plagued by restrictions that range from municipal zoning laws to financial discrimination. Adult performers have had their personal bank accounts shut down without forewarning. Porn producers are routinely refused standard billing fees. Mainstream financial service providers like JPMorgan Chase, Bank of America, and American Express all treat adult businesses differently from other businesses, acting often under so-called “morality clauses” aimed at legal businesses with taboo reputations. (Gun sellers and marijuana companies also face difficulties getting loans and other services.) Even the new wave of financial tech startups like Paypal and Square prohibit some adult businesses from using their products, both explicitly and in tacit ways.

Stoya, an adult entertainer and writer, has experienced these restrictions firsthand: After opening an account under the name Stoya Inc. and depositing checks, JPMorgan Chase shut it down without explanation, she says. (JPMorgan Chase and other banks declined to comment.) In 2015, when she and her colleague Kayden Kross decided to start a pay-per-scene porn site, the two knew it was best to give their venture a vague, innocuous-sounding name: TRENCHCOATx.

“We had so much experience in this industry, we knew that if we named the organization something obscure, it would be better,” says Kross. “So we didn’t run into any of the problems setting up a bank account that we would have if we had given the corporation an adult name.”

U.S. banks are regulated to prevent illegal discrimination against individuals: Financial institutions cannot systematically deny loans and other services based on race, color, religion, national origin, sex, disability, or familial status. But no federal laws explicitly prohibit discrimination against adult businesses. In practice, say critics, this allows for occupational discrimination against adult-industry workers.

In a time of constrained investment across the board, financial discrimination against adult businesses might be most hurtful to small, pioneering ventures, the kind seeking to upend the taboo around sex and porn and promote sexual health and awareness. “The people that these policies hurt most are the small guy or probably more accurately the small woman,” says PJ Rey, a sociology doctoral candidate at the University of Maryland studying digitally mediated sex work. “It is the startup companies that are doing the more progressive stuff, and they are going to be affected more than the really big porn giants.”

In spite of the restrictions, the adult entertainment and sex toy industries are bustling. In the U.S. alone, adult sites generate over $3 billion in revenue a year, according to research firm IBISWorld. (PornHub ranks as the web’s 60th most visited website.) By 2025, is forecast to be a $1 billion business, the third-biggest VR sector after video games ($1.4 billion) and NFL-related content ($1.23 billion), according to estimates from Piper Jaffray. The global sex toy industry is estimated to be worth $15 billion and is growing at a rapid clip.

Still, these businesses can struggle to find banks that will work with them and investors who want to back them. Many VC firms have “morality clauses” that also prevent them from dealing with anything considered adult content.

“We have to think about how straightforward moral stigma informs these policies,” says Rey. But, he adds, it’s unlikely that taboos are the only explanation for the financial discrimination aimed at adult businesses and workers. “The personal politics of the people in the boardrooms has to be a factor to some degree, even if it’s not a conscious thing,” he says.

The perceived stigma of sex and porn not only influences corporate policy at the top, he says, but potentially can be infectious across an industry. “Once some companies start excluding adult businesses, others may want to move toward a conservative policy just to not be sticking out.” A widespread taboo can perpetuate the perception of risk, which can in turn perpetuate the social stigma: “I think it’s probably true that the discrimination itself, in fact, makes adult businesses and sex workers a more risky investment.”

While Kross and Stoya managed to avoid some banking problems, there was another way that their fledgling business would be penalized: billing. Most companies that process credit card transactions have a blanket ban on working with adult companies, and the few that will work with adult businesses process their transactions at an exorbitant premium.

“From my perspective, it seems like a cartel,” says Kross, who explains that TRENCHCOATx, like most porn companies, has to pay 15% billing fees compared to the standard rate of 3% or less. To put that rate into perspective, Kross notes that 15% is the kind of rate you are offered “when you file bankruptcy and then go to buy a car the next day.” It drastically affects their bottom line. For every dollar TRENCHCOATx makes, it loses 15¢, while other companies lose 3¢ or less.

“Their rationale is chargebacks,” says Kross. The adult industry has a reputation for customers demanding refunds at a higher frequency than other industries. The cliché scenario is the husband whose wife is outraged by a charge for porn on his credit card bill: The husband cries fraud and calls the credit card company, claiming he never made the adult purchase in question and demanding a refund.

Kross’s experiences—she’s managed TRENCHCOATx since its founding and has run a solo site since 2008—paint a different picture. “I don’t think our rate of receiving chargebacks is higher than other industries,” she says. TRENCHCOATx has only had to process two refunds, she says, and “I don’t even think either of them was fraud-related. One was an issue that the customer didn’t have the internet speed to support streaming the videos and they asked for a refund.”

Merchant banks contend that they also have to charge these rates and enforce restrictions because working with adult businesses carries other risks. Whether warranted or not, porn is perceived as seedy, and therefore a target for money launderers and miscellaneous criminal activity. Some opt for a blanket ban on all porn because they’re concerned that they won’t be able to distinguish legal adult content from content that either features underage performers or trafficked women.

But critics of these broad policies point out that by pushing both legal and illegal adult content into the same shadowy margins, they’re enabling indecent and illegal businesses to proliferate. In spite of these concerns, the current situation is an unpredictable and inconsistent patchwork of regulations that banks are often reticent to articulate or explain.

When softcore film producer Marc Greenberg tried to refinance his personal mortgage with JPMorgan, he was told that his application had been rejected on the basis of a morality clause.

“It’s a morality clause that’s buried somewhere in the 160 pages of documents you get when you refinance. I’d never heard of this morality clause, nor did I understand how it applied to me,” explains Greenberg. “When they first denied me, I said, ‘How do I know you’re not denying me because I’m Jewish or because my son is gay? Maybe my son being gay is morally reprehensible to you.’ I didn’t know what the reason was.”

In the end, it was Greenberg’s occupation that was interpreted as violating the morality clause. A bank employee had looked up his name on IMDB and rejected his application based on the names of the softcore erotica films that his company produced and distributed, movies like Bare Naked Desires, Bad and Busty and Wild Things 2, the direct-to-video sequel to the Hollywood thriller. “I was obviously outraged,” says Greenberg. He asked the employee, “‘Have you ever watched my movies?” The answer was “No.”

“Had anyone else [at the bank] seen my movies?” “No.” “Could you tell me who made this decision?” “No.” “Would you please send me an official document stating that you denied me based upon your morality clause?” “No.” “Would you point out where in the mortgage agreement the morality clause is?” “No.”

Adding to the bizarreness of the situation, JPMorgan had already held Greenberg’s mortgage for 10 years. This was not an application for a new mortgage but an application to refinance his existing mortgage.

Greenberg filed a lawsuit against JPMorgan for occupational discrimination. It was only during the deposition process that he found out the rationale behind the bank’s decision: JPMorgan believed that if they did business with Greenberg and people found out, it would hurt their reputation and their business.

“This to me was the most offensive part,” says Greenberg, explaining how hypocritical he found this position of moral high ground. “In the last two and a half years, JPMorgan has paid $25 billion in fines for violations of federal securities, finance, mortgage fraud, money laundering—every conceivable, horrible thing that a bank could do, they had been fined for. They have actually fucked people. In my movies people just pretend to fuck!”

Greenberg wasn’t satisfied with the explanation that he posed a reputational risk to JPMorgan. “How was their business hurt when they held my mortgage for 10 years?” he asks. He tried to petition the court to find out if JPMorgan did business with telecommunications companies like Time Warner, AT&T, and Verizon, who are responsible for delivering the content that Greenberg produced, which played on networks like Showtime and Cinemax, to people’s homes. “They refused to answer that. They said, based on confidentiality, they couldn’t disclose their clients,” says Greenberg. “So if they can’t disclose their clients, my question is, how would anyone know I was a client?”

The court ultimately dismissed the case because Greenberg had since sold his production company. “The court held that the [occupational anti-discrimination] statutes weren’t violated because Greenberg was a former producer of adult entertainment, and the statutes do not apply against a person’s former occupation,” explains Bradford Child, a lawyer who represented Greenberg. “Would the ruling be the same if Greenberg had been a policeman and was denied a loan because he was a former policeman? I think not. In my opinion, the unspoken truth is that the court is not interested in prohibiting occupational discrimination where the involved occupation is in the adult entertainment industry, even in Los Angeles.” Although Child says an appeal had merit, Greenberg did not pursue it because of the financial burden.

In a one-sentence statement, a spokesperson from JPMorgan Chase said simply, “We do not have policies that would have resulted in such a decision” regarding Greenberg’s loan.

The most compelling case for banking discrimination of adult industries may be a federal one. In 2014, leaked documents revealed a U.S. Department of Justice (DOJ) program called “Operation Choke Point,” which was designed to pressure banks into denying service to certain disfavored industries including “pornography.” (Payday lenders, ammunition sales, dating services, purveyors of drug paraphernalia, and online gambling sites were also targeted.) Banks, including Chase, complied with the program by closing adult performers’ accounts and denying services to adult businesses, according to Vice News. Earlier that year, Chase even denied payment-processing services through its Paymentech subsidiary to a condom startup (the bank later caved under public pressure and reversed its decision).

In an op-ed for the Wall Street Journal, American Bankers Association CEO Frank Keating wrote that the banks had been forced either to comply or face penalties. William Isaac, the former chairman of the FDIC, called Operation Choke Point “way out of control.”

According to Lawrence G. Walters, an attorney with the Woodhull Freedom Foundation, a nonprofit focused on sexual and gender diversity, imposing restrictions on legal erotic businesses that are engaged in First Amendment-protected entertainment “constitutes censorship–pure and simple.” In a 2014 blog post, Walters wrote that “denial of banking to adult industry participants at the behest of the DOJ likely violates federal civil rights conspiracy laws, [which] prohibits two or more individuals (or government actors) from conspiring to deprive a person’s civil rights or equal protection under the law.” Those laws have primarily been used in the context of racial discrimination, but could be applied to occupational discrimination. “This sort of retaliation against citizens for participating in constitutionally protected activity,” wrote Walters, “is intolerable, if not illegal.”

Rey, the sociologist, says it shouldn’t be surprising that the policies of long-established financial institutions are influenced by vestigial attitudes toward the adult industry and sexual taboos. But when it comes to new financial technology companies, blanket bans on adult businesses seem incongruous with the libertarian ideology that undergirds startup culture.

“Silicon Valley and the porn industry are more or less on top of each other, and they are coming out of the same libertarian, West Coast ethos,” he explains. “There’s a reason why the porn industry is thriving on the West Coast. The moral sentiment is a little more live and let live.”

It’s telling that West Coast companies like Amazon, PayPal, and Square, Inc. in some cases prohibit adult businesses and sex workers from using their services, Rey says. “Silicon Valley has historically paid lip service, when it’s convenient, to embrace a certain cyberlibertarian ideology, but at the end of the day, those are principles of convenience. They are a veneer that companies will wear when it’s convenient to make an argument in court when it’s financially beneficial to them, but they will readily abandon them as well to make money.”

Cindy Gallop, founder of the social sex platform Make Love Not Porn, argues that even when financial startups want to break the mold and work with adult content providers, they are beholden to the banks and traditional finance partners that underwrite their web-based services. “The new world order of money still subscribes to the old world order of money. They still say ‘no adult content,’” she notes.

These bans have far-reaching consequences. “Every piece of business infrastructure that every other tech startup can take for granted, we can’t because of the small print,” explains Gallop. “It’s massively inhibiting our business in a way that’s rampantly unfair, not least because my partner and I believe we can change the world through sex. We are working our guts out to make the world better for all of us, and the world of business and tech is doing everything it can to stop us.”

Still, she says, there are tech CEOs who are willing to work with adult companies with innovative ideas. “Our entire mission is to make it easier to talk about sex,” explains Gallop, whose site features curated pay-to-rent adult videos of real people having real sex, and aims to fairly share revenues with creators. “We want to take the shame and embarrassment out of sex, and when you do that, you tackle what lies at the heart of rape culture, sexual abuse, sexual violence, trafficking, many broken marriages, and many unhappy relationships.”

To start Make Love Not Porn, Gallop bootstrapped the site with her own savings and support from a single angel investor; the site now claims more than 400,000 sign-ups. With her noble goal, Gallop has got the ear of many financial startup CEOs like Ben Milne of Dwolla, a PayPal challenger, Patrick Collison of Stripe (they provide the credit card transactions), and Bryan Johnson, formerly of Braintree, a PayPal subsidiary that specializes in mobile and web payments. “They want to support us. They want to work with us,” says Gallop. “It’s the banks they are partnered with that don’t.”

Dwolla and Braintree declined to go on the record for this article. A PayPal spokesperson said that the service “does not discriminate against the people or businesses who use our services,” and that it “allows for the sale of certain adult content to account holders, who must be over the age of 18 to use our service and who are in countries where this type of entertainment is legal.”

Stripe referred me to a blog post explaining that their partnerships with payment networks like Visa and Mastercard restricts them from working with certain businesses. The company notes that it tried and failed to convince their partners to make an exception to their restrictions against adult businesses for the women’s pleasure-focused sex-ed startup OMGYes. The company admits that its partners’ restrictions “tend to be broad and, as a result, often pretty confusing.”

Meanwhile, Gallop has found a friendly crowdfunding platform in iFundWomen, where Make Love Not Porn is now kicking off its first-ever crowdfunding campaign. Gallop is also developing an investment fund that, she hopes, with an initial target of $10 million, can do for sex tech what Privateer Holdings did for cannabis, an industry that went from taboo to investment darling in just a few years.

Like Gallop, Kross and Ligon are also attempting to disrupt the status quo with their ventures. As a site created and controlled by two women, TRENCHCOATx is already a refreshing exception in the male-dominated porn industry, and its pay-per-scene “curated smut” has been called thoughtful and artistic—not your standard porn fare.

Ligon has similar progressive ambitions. With her e-commerce shop—she renamed it Spectrum Boutique because of all the trouble caused by the word “pleasure” in the LLC’s original title—Ligon is interested in promoting diverse sexualities and sexual health education, selling educational books, gender-identity products like silicon tackers and gaffs, and medical-grade silicone vibrators, which she affirms are an important part of giving women access to tools and knowledge to achieve sexual pleasure.

While financial policies have come to be seen as a simple cost of doing business in the adult industry, that cost also represents a big opportunity for someone willing to go against the grain, Gallop says. “The first bank that says, ‘We welcome honest, legal, decent adult ventures’ is going to clean up!”

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